By: Timothy Puko |
FirstEnergy Corp.’s customers in greater Pittsburgh may face an increase in the charge they pay the utility to deliver power to their homes and businesses for the first time in 20 years as the company battles competitive pressure that’s hurting profits.
The region’s largest power company told analysts in a conference call Wednesday that it will ask for rate increases this year in Pennsylvania and West Virginia. The disclosure comes as the company shifts its focus from power generation and invests money in its delivery business.
The Akron-based company, which operates four utilities in Pennsylvania, expects to get approval from state regulators by 2015 on base rate increases. It didn’t say which of the utilities will be affected. It owns West Penn Power Co. and Pennsylvania Power Co.
Business has gotten tougher for FirstEnergy and other power generators that sell electricity in the competitive market. They are being forced to make expensive upgrades or jettison coal-fired plants because of environmental concerns. Wholesale prices and sales to grid operators are also falling as conservation and rising use of solar power hurt demand.
FirstEnergy, which has been closing coal-fired power plants, on Tuesday announced the first dividend cut in its 17-year history — a 35 percent reduction from 55 cents a share to 36 cents a share. The company expects a $315 million benefit in 2014 from the reduced payments
FirstEnergy is freeing cash and reducing debt for what CEO Anthony J. Alexander called a “total repositioning,” moving away from coal-fired power plants and generation to pursue more of the stable, predictable returns from the customers supplied by its utility power lines.
The company plans to invest about $3.3 billion in upgrades next year, up about $1 billion from 2013 and nearly all of that to improve its transmission lines
“Effectively, this plan positions FirstEnergy for the future,” Alexander said in a conference call about the dividend cut and a drop in its earnings projections. “We haven’t had rate cases for quite some time now. … In recognition of what’s been happening from a customer standpoint in terms of the depressed economic conditions, we’ve tried our best to hold off.”
The company’s stock closed at $31.13 per share Wednesday, down $1.02, or more than 3 percent after it released its gloomy financial data. It told investors to expect between $2.45 and $2.85 in operating profits per share, not including one-time costs, in 2014. That’s a drop of 7 percent to 17 percent from the estimates it gave for 2013 operating profits.
These declines are becoming a trend for nuclear and coal-fired plant owners like FirstEnergy, which have been hit hard by competition from falling natural gas prices, on top of other economic factors. Chicago- based Exelon Corp. also chopped its dividend by 41 percent last February.
Many power companies are looking to build natural gas plants to take advantage of low prices and switch to a cleaner-burning fuel. But FirstEnergy, which already owns West Penn Power and Pennsylvania Power along with eight other utilities, has followed a path closer to Duquesne Light Co., which sold off its generation business more than 10 years ago.
Utilities get a guaranteed return on investment of about 11 percent, so that transition to stable returns makes sense, said Gregory F. Reed, director of the University of Pittsburgh’s Power & Energy Initiative.
With all the pressures on businesses like FirstEnergy, it’s also a good time to switch, he said.
“Companies that (sold off) generation resources earlier on, that’s really the business model that they’ve adapted to, and they’re doing well,” Reed said. “If you’ve been a utility in particular that has a lot of those assets, sure you can get stable, but it’s obviously going to require a different business strategy.”
Once FirstEnergy finishes closing about a dozen power plants, its competitive businesses will make up less than 20 percent of its operations, with regulated utilities making up the rest. The competitive power plants and supply businesses made up 35 percent just two years ago, company spokeswoman Tricia C. Ingraham said.
It does not plan to close any more plants, company officials said in response to questions from analysts. It has cut back to about the same size it had been before it paid $8.5 billion to buy Greensburg-based Allegheny Energy Inc. and its plants in February 2011, said James F. Pearson, chief financial officer.
Analysts on the call with them pointed out that some of the drop in operating earnings projections comes from the distribution businesses it wants to focus on. The costs for running it are getting higher even as revenue stagnates, company officials said.
To get the rate increases it wants, it’ll have to prove that to the state Public Utility Commission. It plans to make its request later this year, though company officials declined to say when or how much they would ask for.
Residential customers pay Pennsylvania Power $11.07 and West Penn $9.37 to deliver every 500 kWh, two of the three lowest rates in the state, according to state Public Utility Commission data. Together, the two serve about 878,000 Pittsburgh-area customers.
West Penn Power Co. hasn’t had a rate increase since 1994. Penn Power hasn’t since 1988. Each increase was more than $50 million coming from consumers, but that came before FirstEnergy owned those companies, and when they were still allowed to charge customers to help build new power plants. That isn’t allowed now.
West Penn in particular has now long been known as having some of the lowest rates in the state, said Irwin A. “Sonny’ Popowsky, former leader of Pennsylvania’s Office of Consumer Advocate. But those rates, nor the long time since an update would guarantee a big rate hike, he added. There are costs, like low interest rates, that make it cheaper to do business, and that could limit any rate hikes.
“I’m glad they haven’t filed in a little while, but it isn’t a surprise” that they plan to now, Popowsky said. “As long as what they’re spending on distribution and transmission is prudent, then they can recover those costs.”